A blog dedicated to commentary, technical analysis, and the general machinations of the global gold and silver bullion markets with additional commentary on the global economy and related commodity markets.

Sunday, March 18, 2007

Just Because You Have A Lot Of Money, It Doesn't Mean You're Rich

It's funny, people's perceptions of money. The focus is too often on the number of digits behind the dollar sign and seldom on it's value.

I came across Forbes' list of the "400 Richest Americans" this weekend. It was printed on 9-21-06. The second sentence of the piece: This year, for the first time, everyone in The Forbes 400 has at least $1 billion. My first thought was, 'Wow, that's amazing.' But as I pondered that bit of information further, I began to think, 'Wow, that's rediculous.' All 400 have $1B dollars or more? 'It must be a lot easier to make $1B dollars in this New Century than it was in the last one,' I thought. So I did a little Googling and quickly found that in 1987, 20 years ago, America's 400 wealthiest people included only 49 billionaires.

Why are there so many more billionaires today than just 20 years ago? INFLATION baby, pure and simple. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services. [Investopedia] In 2006, according to Forbes', The collective net worth of the nation’s wealthiest climbed $120 billion, to $1.25 trillion.Surging real estate, oil and other asset prices paved the way for 28 new members. If I did my math correctly, that is a 10.6% increase in their "wealth" in ONE YEAR. But has their wealth really increased, or do they just have more dollars to count?

Surging real estate, oil and other asset prices... Rising prices, the result of an inflating money supply, has allowed a lot of people to become billionaires based not on the "value" of their money, but by the number of digits behind the dollar sign that then puts a "price" on their assets. Billionaire, millionaire, or blue collar HVAC repairman...the price of your "assets" may have risen in the past 20 years, BUT the "value" of them has not.

Just because you have a lot of "money", it doesn't mean you're rich. The fact that today there are 400 Billionaires in America and twenty years ago there were only 49 should prove that. Need more proof? The "value" of the US Dollar has dropped about 35% just since 2002. In otherwords, $1M since 2002 has lost $350,000 of it's "value" in 5 years. One billion dollars was a pile of money in 1987 and it's a pile of money today...it's just not worth nearly as much, and it's no big deal.

It would be interesting to note here in closing then, that in 2002, one ounce of Gold cost about $255. Today, once ounce of Gold costs about $655. An increase in price of about 257%. In terms of US Dollars, the "value" of $1m worth of gold since 2002 would have risen $257,000 to $1.257M.

The moral of our story...Rich Person A, with one million dollars in their bank in 2002 who left that stash in cash, is $350,000 "poorer" today than Rich Person B, who bought gold with their one million dollars and is $257,000 "richer" today based on the "value" of their one million dollars. Yeah, Rich Person A will ignorantly tell you that he still has $1M in his bank account, but what he doesn't realize is, is that it won't buy much.